Metamorphosis - In our first article in the Welcome to Pharma 3.0 series, "A New Business Model for Delivering Sustained Value," (CHEManager Europe 2-3/2010), we described how the industry's legacy business 1.0 model, based on marketing blockbuster drugs, is currently morphing into a more diversified 2.0 model. Knee-deep in the transformation to 2.0, the industry is preparing for its next and most profound transformation to a 3.0 model-moving away from a focus on products to a focus on health outcomes. In this article, we look at key strategies for growth that are already propelling the industry to its next phase of evolution.

The Pursuit of Emerging Markets

In today's global pharmaceutical industry, most companies view emerging markets as a strategic source for future growth. They are expanding business from the major markets of the U.S., Europe, and Japan to the BRIC region (Brazil, Russia, India, and China) and the next 11 emerging markets (Mexico, Nigeria, Egypt, Turkey, Iran, Pakistan, Bangladesh, Indonesia, Vietnam, South Korea, and the Philippines). With strong demographics, a rising middle class, a shift from infectious disease to lifestyle-associated chronic diseases, and often, an improving environment for intellectual property (IP), these markets are rife with opportunity.

Although emerging markets offer much promise, they also represent enormous challenges for an industry that has focused so much of its efforts on selling to the top of the income pyramid. Despite rapid economic growth, the percentage of gross domestic product (GDP) spent on health care is still very low in these markets, as is health insurance coverage, with most health care costs paid out of pocket. Such markets are often characterized by unevenly applied regulations, rampant counterfeiting, disjointed political landscapes, and fragmented distribution and retail end-markets. Also, because major emerging markets have few similarities, the potential is limited to leverage scale, requiring customized approaches in most countries.
Yet, as economies develop in these markets and wealth grows, health care is increasingly a focal point. Reform measures designed to bring health care to a larger proportion of the population are sweeping just as quickly through emerging markets as through developed markets. Such measures will further support emerging market growth and will have far-reaching effects on the global pharmaceutical industry, challenging established norms of pharmaceutical access, use, and distribution.

Reforms are being considered or enacted, in fact, across all BRIC markets. Perhaps the most progressive activities to date are in China. "Healthy China 2020," the nation's mid- to long-term plan for health care development through 2020, is a key vehicle for achieving universal access to essential health care services. China's state council passed the plan in January 2009, allocating $124 billion for five priorities to address soaring medical costs, the cost and quality gap between urban and rural health care, and inequities in funding and resource allocation. Given China's large population and current low rate of insured individuals, its reform plan will create a huge growth market for the pharma industry. Of the overall investment in health care, 45% is earmarked to improve national coverage, which is expected to translate into a significant increase in drug consumption. The latest pharma forecasts indicate that in the year to come, China will become the world's third largest market. Its growth rates in the double-digit range will outpace growth in all mature markets.

As pharma companies increasingly target emerging markets such as China's, they are taking a holistic approach, encompassing market access, localization, and an innovative supply platform aimed at serving the local market and leveraging back to the global organization.
Local emerging markets present both an epidemiology and purchasing power that barely match the portfolio and pricing strategies of most multinational companies (MNCs). To expand their footprint, companies are increasingly venturing into the field of branded generics, either through acquisitions or alliances. The branded generic market is detailing-intensive, and while MNCs are shrinking their sales forces in mature markets, they are building them up in emerging markets. Often, pricing strategies in emerging markets have put the most innovative drugs out of reach for average-income individuals. Arriving at dynamic - and sustainable - pricing strategies requires maximizing market penetration and revenue, while at the same time covering costs. In a market that has become a playing field for commercial innovation, MNCs are developing and testing customized approaches and applying different strategies, with offerings ranging from a pure-play innovative drug portfolio to branded generics; pricing strategies varying from western prices to a tiered approach; and geo strategies ranging from a focus on tier 1, 2, and 3 cities to pursuit of rural markets.

China has recently attracted much of the emerging markets' investment in research and development (R&D). Centers are being implemented locally as part of the global organization to tap into the supply of scientists, to serve as a base for managing alliances with academic centers and service providers such as clinical research organizations (CROs) and contract manufacturing organizations (CMOs), and to explore local epidemiologies.

Expanding Commercial Models

Customer segments in mature markets have been expanding beyond the traditional base of physicians to include a broad range of additional customers, such as governments, insurance companies, public agencies, pharmacists, hospitals, and patients. To adapt to these evolving customer profiles, pharma companies are transforming their approach to brand, marketing, and sales management. At the same time, they are moving from a transactional model of interaction with customers to a more systematic, customer-facing model where all levels of the organization, not just the sales force, are focused on the customer. Most companies are dismantling their large sales forces in the field, traditionally focused on physicians, and instead developing sales approaches and more specialized sales teams tailored to new customers and products.

For physicians, from individual practitioners to large group practices, they are using more focused sales forces - key account management programs for pharmacists and major distributors and small senior sales forces for payors and hospitals. While doing so, they must adapt their strategies to the different dynamics of each country's local customer base and buyers.

For consumers, companies are using a variety of marketing tools to raise their products' visibility. Along with direct advertising campaigns, where allowed, many have launched patient support programs such as disease therapy websites, patient/doctor kits with DVDs that provide instructions on how to use medicines, and toll-free lines that give patients direct access to a pharmacist or nurse.

The rapid emergence of social media sites has provided a promising avenue for marketing communications and patient engagement. Yet regulatory guidance on appropriate use of this new medium has emerged only recently, and decentralized content creates new challenges, including determining whether companies are responsible for off-label promotion conducted or adverse events reported by individuals outside their control.
A common theme across reform initiatives in mature markets is an increased focus on health technology assessment (HTA) by government and payors to support market access and pricing and reimbursement decisions. Beyond the three hurdles of assessing the quality, safety, and efficacy required for market authorization, HTA is creating a value-based "fourth hurdle" for drugs and devices. Life sciences companies have responded to these challenges with increasingly innovative pricing arrangements, especially in markets such as Australia, UK, and Italy.

In the future, companies will need to optimize the value from clinical trial design to gain a competitive advantage in launching new products, as well as manage reimbursement risks.

Building an Infrastructure for Innovation

Pharma companies have been pursuing strategies around scientific advancements-prioritizing therapeutic and disease categories and exploring biotechnology and personalized medicine. Yet to fully leverage these opportunities, they must reshape their innovation organizations. The realization that scaling innovation organizations will not translate into increasing their output and that creative work survives in smaller environments is not new; neither is the awareness that much of the innovation will need to be sourced and co-developed with ecosystem partners using an "outside-in" approach. However, best practices have not yet emerged on how to best structure these organizations. Companies have been experimenting for almost a decade with settings such as centers of excellence around therapeutic areas with a strong emphasis on open innovation, through collaboration with biotechnology and medical technology start-ups, or with service providers such as custom research or clinical research organizations.

Internally, building an organization that makes these principles come alive is proving to be a formidable challenge. A major cultural change is needed for people to interact and exchange across loose global networks instead of within a rigid and closed organization. New skills and competencies need to be acquired and integrated, and this new diversity fostered and managed in a formal governance structure that encourages fresh thinking and continuously supports innovative approaches.

Diversifying and the Quest for Efficiency

As the prescription drug market becomes increasingly unpredictable in pricing, reimbursement, and generic competition, companies have been moving away from pure pharmaceuticals and diversifying into other business lines such as vaccines, generic over-the-counter products, animal health, and medical technologies. While this strategy enables current challenges to be better navigated, and offers the promise of reliable cash flows to investors, it will ultimately result in declining operating margins, as no other sub-sector is delivering as high margins as the branded pharmaceutical business. It might also increase vulnerability to economic cycles, as other business lines might prove less resilient in a troubled economy. Underlying these diversification strategies, efforts to cut costs and create new efficiencies are underway with a heightened sense of urgency triggered by the latest financial downturn.

Using New Measures That Matter

One might argue that most of the tactics the industry is using now will only delay the impact of current pressures. What is needed instead is a collaborative approach, through which all system players work together to co-create value and improve health outcomes. As we described in the March issue of CHEManager Europe, changing incentives are reshaping the health care ecosystem and will require a new business model, Pharma 3.0. The primary agents of change are the payors and the government-led reform initiatives, health information technology, and the rise of consumerism - all converging to transform the business of pharma, from developing and selling drugs to delivering health outcomes.

For the pharmaceutical industry, the shift to a new business model brings opportunities for growth. In Pharma 3.0, the industry will increasingly engage fellow ecosystem players in a patient-centered approach to care. Innovative partnerships will include governments, payors, and patient organizations, but also new ecosystem entrants such as eHealth/mobile health firms, large retailers, medical technology companies, and telecommunications players.

The Pharma 3.0 model has tremendous potential to redefine our approach to health care. For example, the current call for collaboration launched by the government of Singapore as part of its "National Grand Challenge 2010" initiative, targeted at obesity and pre-diabetes, reflects what might lay ahead in care innovation.
For this shift to happen, substantial change is needed in decision support within pharma companies in making strategic decisions, redefining business models, and conducting business planning in a common language to foster a shared point of view among all stakeholders. These stakeholders range from internal functions such as corporate development, corporate finance, and controlling to external stakeholders such as the financial markets, rating agencies, and the general public.

With changing business models, new "measures that matter" will emerge: They will be ecosystem related, including health outcomes, comparative effectiveness, quality of life, value of prevention, marginal value of expanding access, and societal value of outcomes; and enterprise related, with new metrics for product profitability, value of corporate social responsibility, and colleague engagement - or as a multiplier effect of business model innovation, with value of revenue coming from a new, versus a traditional, revenue stream.
Pharmaceutical companies today are well on their way to operationalizing their Pharma 2.0 models. The upcoming collaborative Pharma 3.0 business models will require profound changes in the metrics and measures needed to navigate the rapidly changing health care ecosystem. As financial executives steer their enterprise through changing business models, they are taking an increasingly strategic approach to value creation. In the next article, we will look at pharma's "grow lean" strategies and their approach to creating a sustainable cost advantage through performance improvement, cost reduction, cash flow, and capital allocation.